A bad co-founder (BCF) is often lethal. It is very hard to remove a BCF from the cap table, which creates all sort of bad signals and very often leads to the company’s death.

If it is always bad to have a BCF, the harm caused by a BCF is more limited in COs than in TOs: (1) the BCF cannot block the governance of the organisation due to the increased separation between financial rights & governance rights in COs (2) the BCF does not prevent (technically, financially & psychologically) new investors from investing as the BCF’s shares are not as dilutive as in TOs (3) the BCF will not capture as much future value creation as he would in a TOs as the supply of share is not fixed (4) the BCF can leave the cap table more easily thanks to the increased liquidity of COs

The long-expensive-shareholder-agreement risk

Spending a lot of money and time for a shareholder agreement (SA).

While a shareholder agreement can be established with a lawyer, it is less relevant. Most of the clauses of the SA are parameters of the smart-contract and automatically enforced by the smart-contract.

The employee-interest-alignment risk

It is difficult for founders to properly align their employees to the success of the organisation.

Employees can be compensated with security tokens that have the same financial rights as founders and investors + are liquid and for which their have full ownership. What else?

The early-employees-recruiting risk

Good hiring is particularly critical in the early stages of a TO when resources are scarce. A bad hire can really harm the organisation

Bad hires are always possible but as tokens have real tangible value: (1) It is easier to attract A-players (2) Motivated and mission-driven employees will gladly accept to have a significant part of their compensation paid in tokens, increasing their risk but also their reward, and lowering the cost to the organisation

The early-days-financing risk

It is hard to find the resources to pay for quality resources in the early days of an organisation

Due to financial attractiveness of the security tokens issued by a CO, they can be used to reward the early contributors to the project who help it get off the ground.

The death-while-raising risk

Fundraising is a full time job which divert the focus of the founder

The fundraising is continuous and permission-less, the founder can focus on executing and investors can invest at the moment they feel comfortable

The personal-liquidity risk

In TO, the founder can have a very successful company but still be personally poor.

the founder has access to early liquidity, which he can decide to use (or not) depending on its personal financial situation and his risk profile evolution

The burn-out risk

In TO, when a founder has a burn-out, he usually cannot step down without leaving a lot of financial value on the table.

the founder is incentivized to step down and organize a smooth transition to protect the organisation and preserve the value of his tokens

The community-building risk

Community-building for for-profit organisation is hard and it’s getting harder as people become more and more defiant of startups.

The organisation community has the possibility to buy, earn or be granted to token which will align them financially and fairly with the success of the startup. As a side note: most possible say Facebook should pay its users for their data, it is stupid because the economics don’t work (being paid a few bucks / year doesn’t change people’s lives) however, it would have been another story if people could have easily buy shares from FB since the beginning of the social network.

The loss-of-control risk

In TO, the more funds an organisation raises, the more founders get diluted. In avg, founders have 6% of their organisation and lost all control at the time of IPO.

The more the organisation generates revenues, the more the founders can "relute" themselves while preserving the financial upside of their investors.

For investors

All-the-above risks (reducing the entrepreneurs’ execution risks is a good thing for investors) +

The Risk

Risk description

With Continuous Organisations

The no-liquidity risk

Investors are stuck with their investment and cannot sell their shares

If the organisation is performing well, investors can sell their shares at any time at a "public market" price. If the organisation is not doing well, investors can still sell, most likely with a loss but a least they can recoup part of their initial investment.

The longterm-value-capture risk

At every round of financing in TO, a new class of preferred shares are being issued, seriously impacting the performance of earlier investors who most often have to reinvest if they want to continue capturing a lot of the value.

All investors are treated equally so first investors are always capturing more value than later investors.

The screwed-business-angel risk

For the reasons exposed before, business angels have a hard time capturing the fair value for the risks they take by investing very early.

Investing in utility tokens which finances great successful projects but for which the token value goes to zero or stays very low.

Tokens emitted by COs are security tokens which value is directly correlated to the financial success of the organisation.

The no-governance-rights risk [ICO]

Investing in utility tokens does not provide any governance rights on the organisation to the investor. If the organisation decides to abandon its token for example, the investor cannot do anything.

Security tokens are at the heart of COs and investors have veto rights on the modification of the smart-contract financial paremeters. Plus, given enough tokens, investors can challenge and replace the management if needed.

The regulatory risk [ICO]

Utility tokens can be reclassified as securities in today’s regulatory context, creating uncertainty for investors.

Security tokens are securities and regulated as such.

For employees

All-the-above risks (reducing the entrepreneurs’ execution risks and having a better alignment between entrepreneurs and investors is a good thing for employees)

The Risk

Risk description

With Continuous Organisations

The my-stocks-are-worthless risk

Without liquidity, an employee’s stocks / stock options are worthless. Especially true if the organisation starts accumulating bad news. And even if a positive liquidity event occurrs, the various liquidation preferences given to investors reduce drastically the value captured by employee’s stock options.

employees’ tokens = founders’ tokens = investors’ token + they are fully liquid and can be sold at anytime.

The valuation-thresholds risk

In TO, the financial upside of employees is significantly affected by valuation thresholds: (1) If an employee arrives before the incorporation of the company, he’s a co-founder with double digit shares. 1 day after, he’s a 1st employee with single digit shares. (2) If an employee arrives before the 1st round of financing, he gets a much lower strike price for his stock options than if he arrives 1 day after the round of financing

The continuous aspects of COs remove these thresholds.

The i-will-lose-my-stocks risk

If an employee leaves an organisation, he loses his stock options. If an employee is fired, he loses his stock options.

The employees’ tokens are his. period.

For society

All-the-above risks (having better organisations is a good thing for society)

The Risk

Risk description

With Continuous Organisations

the scam risk [ICO]

Society needs money to be invested in innovation but citizens don’t like to be scammed, and neither do regulators. By their nature, ICOs selling utility tokens are very prone to scams. The very early stage nature of the projects selling utility tokens with a highly uncertain future value yet sold at an initially high valuation is an explosive combination. The unsophisticated retail investors are losing and will continue to lose money in these type of projects which might turn them away from financing innovative projects if they feel fooled.

There will be good and bad projects but, at least, due to the nature of security tokens, the tokens value is directly correlated with the success of the project, unlike with utility tokens where highly successful projects can have very low value tokens.

the wealth-redistribution-inequality risk

[Warning: This is a gross generalization, I only want to write 2 lines on it, not engage in a political debate] Large and increase wealth inequalities put the stability of societies at risk. In the VC model, money is not very largely redistributed within the society. Most of the money compounds at the VC and LP levels, making VCs and LPs richer and richer, increasing wealth inequality in the society. Again, I don’t want to engage in a political debate, but one could argue that this increasing wealth inequalities are starting to heavily fuel a wave of populism in western democracies that could have very dangerous consequences.

The continuous fundraising nature of COs (anyone can invest, even at the earliest stage) and their equal treatment of all shareholders (no preferred stocks with liquidation preferences etc…) combined with the security nature of the tokens can enable a much fairer and inclusive redistribution of wealth throughout the society.

the investment-diversity risk

[warning: gross generalization again] Society needs to capital to be allocated across the complete spectrum of entrepreneurs but, in the current VC model, capital is not allocated in a very diversified manner, most of it goes to extremely well educated white male entrepreneurs. Female founders, minority founders and non-Ivy league school founders have a much tougher time to access capital. This is mostly due to a self-reinforcing effect that most VCs invest in people they understand, i.e. people who have more or less the same background and culture as them.

COs are no silver-bullet but by reinforcing angel investments and broadening the early stage source of capital (angels, community, partners…), COs can bring capital to a much more diverse population of entrepreneurs.

the no-long-term-focused-organisations risk

Society needs a vibrant economy creating very large and long term focused companies that creates a lot of wealth through jobs, taxes and fuel R&D innovation. As most founders in the VC model tend to lose control of their organisation, making such giant companies emerge from the VC model is not straightforward. Liquidity events (sale, IPO) notably can be very traumatic for organisations, especially when the founders lost their control of the organisation.

The continuous nature of COs and the native relution of founders through revenue generation could be key characteristics to help build giant wealth creating organisations.

For the regulators

All-the-above risks (improving society is a good thing for regulators)

The Risk

Risk description

With Continuous Organisations

the scam risk [ICO]

Regulators want innovative projects to operate within their jurisdiction but they also want to protect their citizens from scams and fraud. As explained above, current utility token based ICOs are much more prone to scams than ICOs of security tokens.

Regulators can have the best of both world by allowing innovative projects to settle and thrive in their jurisdiction while protecting their citizens from utility tokens scams.

the no-tax risk

Taxing organisations in the digital economy has proven challenging for regulators, yet they need to collect fair taxes to operate and provide welfare to their citizens.

Taxes can be withheld directly and automatically at the smart-contract level, when investments are sold and revenues perceived.

Great comparison of risks for TO and CO organizations. Thanks for providing this level of detail. I do have a question regarding your statement in the society section under “wealth redistribution-inequality risk”. With COs you say that anyone can invest in the CO even at the earliest stages. If as you previously stated in the investor section that “Security tokens are securities and regulated as such” you are positing a dichotomy in that only accredited investors are allowed to invest in private equity offerings under current U.S. securities laws. Please elaborate on your thinking so that we can better understand the application. Thanks…

Hi @SoHo, luckily their are exceptions in the US securities laws In the case of CO, we think that Reg CF could the best regulatory framework to use for a CO. Reg CR allows an unlimited number of non-accredit investors to invest (maximum $100K / investor) given that the organization does not raise more than $1M / year. On top, it is compatible with Reg D so the organization can exceed the $1M threshold with accredited investors. Reg CF is not perfect but it seems like a good starting point.